House before pension? Government plan should allow early access

Across the State, the Department of Employment Affairs and Social Protection has been running seminars on its plans to introduce a form of automatic pensions for the estimated 53 per cent of the population who don’t have a private pension.

There is much to discuss, and many decisions to make.

Auto-enrolment, whereby employees are automatically enrolled (although this is one of the fine points that have yet to be worked out; some countries choose an opt-in approach – others force you in and then give you the option to opt out) has been a long time coming. One of the first mentions in this newspaper of the approach came as far back as 2006, when then minister for social and family affairs, the late Seamus Brennan, said the government had a responsibility to ensure the 900,000 people or so without a pension could be provided with a decent income.

Scroll forwards 12 years and these 900,000 people are still without private pensions, and auto-enrolment is subject to yet another consultation, with little action taken. Indeed its implementation is now set for 2022, but with so much still to be agreed upon – and crucially – buy-in from employers still to be achieved, even this date may not be attainable.

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But big decisions need to be made. And soon.

As the clock ticks, so too does people’s ability to achieve this “decent income”. As pension advisers are wont to warn us, starting early can make a huge difference on the retirement income we end up with.

House deposit

One of the big determinations to be made is whether or not people should be allowed draw down some of their pension funds before they retire. With housing in crisis, there are likely to be calls to allow people to use some of their pension savings to fund a deposit on a home.

The risk is that by doing so, “leakage” will occur, whereby funds ostensibly for retirement are used for another purpose, thus negatively impacting pension income. Another issue lies in asset allocation. If you’re a 30-year-old invested in high-yielding equities, you could risk crystallising a loss if you’re looking to cash

in at a certain point. Or what about the risk that you can never replace what you’ve taken out? That your employment prospects actually diminish thereafter. And we haven’t even considered tax yet – if people have benefited from tax relief of between 20 and 40 per cent on the way in, shouldn’t they have to pay on the way out?

And yet. All the above would be true if pensions themselves were perfect.But they’re not. Apart from those in defined benefit or final salary pensions (where the employer is bearing the brunt), pension outcomes remain mixed, despite years and years of saving. Poor investment performance, high charges, opaque structures – pensions don’t always deliver.

So, allowing people to draw down some of their pension savings to facilitate buying a home, which will at least provide the certainty of a roof over their heads in retirement, must make sense.

After all, it’s not without precedent.

In the US, savers in 401k schemes can access their funds as a loan, on hardship grounds, or simply when they move jobs.

And down under, New Zealand’s KiwiSaver allows savers to withdraw all of their retirement funds apart from $1,000 (€571) once they’ve been saving for three years and have never owned a home. Recent research shows that most first-time buyers now come to the deal with about $40,000 (€22,873) in KiwiSaver money.

Leakage issue

As mentioned there are challenges; in the US, it’s estimated that about 40 cent in every $1 “leaks” out of 401ks. But there may be ways of containing these.

In the UK for example, policy makers are trying to overcome these difficulties in their efforts to introduce a “side-car”, or early access, to the Nest auto-enrolment scheme. It’s looking at a hybrid approach, whereby pension contributions are shared between a pension pot and a liquid savings vehicle; if you want to access funds, you’ll draw them down from the liquid side, leaving the other side to continue to grow until retirement.

Behavioural research also highlights the benefits of such an approach. It makes use of “procrastination bias”, because people can give up their money without having to make a decision on it straight away, while also addressing “short-term bias”, in that people are more likely to save with greater intensity for a short-term goal.

And there is something also to be said for treating people as being capable of making their own financial decisions.

Back in the dark days of the crash, minister for finance Michael Noonan reluctantly allowed cash-strapped pension savers to access as much as 30 per cent of any additional voluntary contributions (AVCs) they had made. He feared an onslaught of withdrawals, but in the end just €60 million in tax was collected on the back of the early withdrawals – far less than the €200 million envisaged. So it was only those who were most in need who availed of it.

Unfair

And is it fair that the Government should restrict one cohort of people availing of auto-enrolment – typically lower earners – from accessing their pensions before retirement, when on the other side, people with multiple pension funds – typically higher earners – can start accessing these from the age of 50? Moreover, those with the means can also seek to “liberate” their pensions by routing them through jurisdictions such as Malta.

Of course, the Government may take another view on it and prioritise pension savings above all.

But doing so presents another risk. Not least to its own coffers.

The Government says it’s going to spend about €3 billion on rent subsidies such as the housing assistance payment (HAP) over the next three years. At the moment fewer than 16,000 of people over the age of 60 are in the private rental sector. If home ownership trends continue, however, that HAP bill could get a lot bigger as a new generation of pensioners need help paying their rent.

If you want your voice to be heard, the department is accepting submissions until November 4th via autoenrolment@welfare.ie